Friday, November 06, 2009

Reality bites the housing market.

If you recall, a couple of years ago I took a couple of housing cost charts and plotted trendlines for them. Those are now, of course, hopelessly out of date. I wondered if anyone else had done one, so I wouldn't have to do another, and sure enough, somebody has. The upside is I don't have to the work. The downside is that the latest figures make an uglier looking trendline.

Seeking Alpha
Property Values Set to Fall 43% from Current Depressed Levels
Michael David White
November 2, 2009

Price Trends / WAR OF THE WORLDS: If you use a 20-year time horizon, and assume prices will return to the trend line, then our residential property bubble will bottom after values fall over 40% from current levels (see above (c) aka “(y) - (z)” aka “Loss Today to Bottom”)...

...No one would question these numbers absent The War of the Worlds. The War of the Worlds is the United States Government versus aggregate borrower income. Uncle Sam is funding every new mortgage – high, low and in between (see chart below--the blue and red represent government-backed loans and the private market is the yellow and green). It takes very little imagination to see the world of real estate prices vaporizing without government support. If that support was lost, values would crash down faster than a big rock dropped into a shallow puddle.

...Reality bites. Prices for real estate are ultimately determined by our income, and if the trend represents a match of income and price, then the picture of the trend line is the picture of our future...

What he's saying is that the market can't bear prices above what people can actually afford, and with wage stagnation being a fact of the last 30 years, prices of homes (and everything else, for that matter) have to go back to 1970s levels or people will simply not be able to qualify for conventional mortgages - you know, the only ones with any validity and sustainability.

This is what happens in an economy that is not focused on living wages. The top 10% of earners, the Robber Barons, live like kings while the bottom 90% of people watch their wages get reduced to the level of having to compete with third world backwaters, all in the name of a con game called "globalization."

In those backwaters, CEOs get to externalize costs. That means instead of the company paying the true costs of its labour and production, a great deal of that cost is shoved off onto the local government and their cost is never reflected in the price of the products. Businesses located in America, however, have to pay themselves for their worker's safety, for environmental protection, and have to pay a minimum wage, obey laws regarding the number of hours a person can work every day, laws regarding overtime pay, rules giving people the right to their sabbaths, religious holidays, sick leave, vacation days, and other worker's rights we, as a Judeo-Christian nation, decided were the moral and ethical way to do business.

So building a house in America means these costs are "internalized" and properly reflected in the price - except, of course, when the contractors hire illegal immigrants and can get away with not paying the proper taxes and can get away with mistreating them.

Houses, in other words, have for the most part First World ethical and moral costs built into their price.

The problem is that the jobs that would have enabled people to buy the houses at the proper price - manufacturing, for example - have been shipped off to places where these costs can be externalized and the employees can be mistreated and overworked with impunity. And the higher end "service economy" jobs, the various trades and professions, are competing in such an overcrowded field (comprised of those who would formerly have been manufacturing employees) that the market is too saturated to support them all. Their wages are therefore also seriously depressed, and business failures are more and more common.

So Americans are left with little else but low end "service economy" jobs like flipping burgers, mowing lawns, stocking shelves, and doing people's laundry for them - none of which pay living wages. In a normally functioning economy, these types of jobs would be taken by young people, by those who intend to "work their way up" the corporate ladder, by those transitioning out of paid employment, and by those who only want part time work so they can spend the rest of their time doing something else, whatever that may be. These types of jobs do not and cannot be the main source of income for a middle or upper class family. The pay is simply inadequate to support a household, much less buying a house.

That means the median price of housing has to fall to the level that most people can afford to buy a house - that means falling to the level of low-end service job incomes. Too bad for you if you bought your house after the 1970s - that means your house is probably going to lose value further. And my condolences if you owe money on a house bought since the 90s - you will be underwater soon if you aren't already, and the bottom is nowhere near being reached. The trendline is clear, as is the logic behind it - median home prices have to be affordable to median incomes, and median incomes have been flat (adjusted for inflation) since the 70s due to globalization.

If you want to save the value of your house, then you had better be supporting living wages and relocalization of manufacturing. If you choose not to, don't complain that you owe your bank twice what your house is really worth. And don't claim your house is "really worth" what you paid for it. It's not. It's only "really worth" what the market will bear, and the market can't buy 2009 homes with 1970s income.

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